How to Protect Your Online Business from Real World Lawsuits

July 05, 2018

Since many types of online businesses can be operated from home, they are enticing to entrepreneurs. You may be considering starting an online business because of the financial advantages of not having to pay for a storefront and having a vast reach. These are a few common types of online business categories today:

There are plenty of tools and tutorials available to help entrepreneurs get started. If you are considering starting a new online business, setting up a user-friendly website may be your priority. You might have a good business plan for success and valuable software tools to help you succeed, and you may be excited about the many real-world benefits associated with a virtual business. However, one important consideration that some new online business owners overlook is protecting themselves from lawsuits. Since many online businesses do not have storefronts, it is easy to assume that there are not as many liabilities. However, the following scenarios illustrate some liability issues that online businesses are more likely to face.

Scenario: Data Breach

Imagine that a company sells products or services online using an e-commerce platform. When customers go through the checkout process, they enter sensitive information such as credit card data and identification details. This information is valuable to thieves who can sell it or use it themselves. Although it helps to use a secure server and a firewall, there are plenty of other security issues that must be addressed. According to the Hiscox Small Business Cyber Risk Report, 47 percent of the small businesses surveyed experienced a data breach in the last year. More than 44 percent of those respondents experienced multiple breaches. Lawsuits from clients inevitably follow data breaches. If a business has employees, they may also file lawsuits for breach of contract or negligence if their personal information is compromised.

Scenario: Jurisdictional Issues

Although a business owner may only be targeting a certain geographical area, the website will be visible in other jurisdictions. In less-regulated industries, there are issues regarding advertising, defamation and claims. If a company's message reaches a jurisdiction where an offer, a service or certain website content is illegal, there could be a lawsuit. Some business owners who operate online have faced problems from foreign jurisdictions or other states in the past. If your company makes any type of claim or offer, you must ensure that it is legal in jurisdictions where it is available. If applicable, you must also state limitations for service areas and offers to reduce the risk of a lawsuit.

Scenario: Unsatisfied Client

If a company provides creative services such as writing or graphic design, the business may be more likely to face client satisfaction issues than a business that offers tangible products. The client may be satisfied with the content but may be unhappy with its intended results. Imagine that a business runs social media pages for a boutique clothing store. The online business owner develops a new strategy to increase the client's reach and to bring more customers into the store. However, imagine that the client's merchandise is overpriced or the store employees are not very helpful to new customers and the combination of these factors hinders the predicted growth results. The client may try to sue the online business, but the owner can be prepared with the right insurance.

Do I Need Business Insurance for an Online Business?

There are plenty of other possible legal issues depending on your industry. In addition to facing the risk of lawsuits from clients or employees, you could face lawsuits from vendors or other businesses. Copyright lawsuits are common and may affect any online business, and vendors could sue companies for breaking a contract or for other issues. For example, if an online business owner meets a vendor to discuss a project and inadvertently injures the vendor with the presentation equipment, the vendor could sue the business owner to compensate for any injuries. Part of learning how to set up an online business properly is knowing which types of insurance to purchase.

How to Set Up a Successful Online Business

Before you decide on the type of insurance you need for your online business, you will need to set up your enterprise first. There are several key steps involved in this process.

  • Determine the structure of your business: Will you be the sole owner and operator of your business? Do you intend to form an LLC? Before you do anything else, figure out exactly what type of company you wish to establish.
  • Settle on a location: You will be conducting business online, but you still have to file paperwork with the particular state in which you and your company will be headquartered.
  • Name your business and associated website: This sounds obvious, but it's important. Once you have decided what to call your new business, you will need to set up your own website. Many online companies exist that allow you to register your own domain name.
  • File the business formation papers with the appropriate state agency: Once you file the required paperwork and pay the filing fee with your state, you'll receive a document certifying the existence of your company.
  • Familiarize yourself with all of the financial, tax, and licensing aspects of setting up an online business: You'll need to get a federal tax ID number from the IRS. You will also need to set up a commercial bank account so that you can handle transactions. Depending on the state in which your business is located, you may have to get a business license and collect and pay sales tax.
  • Set up your website: Whether you have experience with coding or you hire someone to create your website, make it as eye-catching and unique as possible to attract customers to your new business.[6]

What Kind of Insurance Do I Need?

After you decide how you want to set up your business, study your insurance options carefully. There are several important types of coverage that an online business needs.

  • Professional liability insurance covers claims that are made against your business based on negligence or various types of client dissatisfaction. If you provide a professional service such as consulting or marketing, this coverage is especially valuable.
  • General liability insurance is essential for any company with a storefront. It protects your business from claims of bodily injury, personal property damage and personal injuries. This insurance also covers slander claims.
  • A business owners policy combines business property insurance with general liability coverage. The property insurance covers your online business items such as computers and other equipment. For example, if your home office is damaged by a faire, but home owner’s insurance will not cover the damage to a high-end computer, a business owners policy could enable you to get back in business by covering the cost to replace the computer. 

There are also special insurance options for cyberattacks and security breaches. If you plan to use an e-commerce platform that collects or stores sensitive information, you must also have a plan to address what will happen if that information is compromised. These are some specific insurance issues to consider:

  • Privacy protection
  • Breach costs
  • Cyber business interruption
  • Hacker damage
  • Cyber extortion
  • Multimedia liability

Get the Right Insurance for Your Online Business

To determine which insurance options to buy for your business, identify your operational tasks. An LLC may have different coverage needs than a sole proprietorship. A consulting business may have liability requirements that differ from a more traditional e-commerce site. No matter what type of online business you intend to run, you will be able to choose an adequate level of coverage based on your company's particular needs. You can learn more about online business insurance choices when you request a free quote from Hiscox.